Here's Why Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd (SHSE:603227) Can Manage Its Debt Responsibly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Xinjiang Xuefeng Sci-Tech(Group)Co.,Ltd (SHSE:603227) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd

What Is Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd's Debt?

The image below, which you can click on for greater detail, shows that Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd had debt of CN¥822.5m at the end of September 2024, a reduction from CN¥987.3m over a year. However, it does have CN¥1.03b in cash offsetting this, leading to net cash of CN¥208.5m.

How Healthy Is Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd's Balance Sheet?

The latest balance sheet data shows that Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd had liabilities of CN¥1.57b due within a year, and liabilities of CN¥711.4m falling due after that. On the other hand, it had cash of CN¥1.03b and CN¥1.76b worth of receivables due within a year. So it actually has CN¥509.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd saw its EBIT decline by 3.0% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd has net cash of CN¥208.5m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥853m, being 70% of its EBIT. So we don't think Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Xinjiang Xuefeng Sci-Tech(Group)Co.Ltd has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.